Business and Politics in the Russian Regions 5 7
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BUSINESS AND POLITICS IN THE RUSSIAN REGION S Robert W. Orttung American University The National Council for Eurasian and East European Research 910 17' Street, N .W . Suite 300 Washington, D.C. 20006 TITLE VIII PROGRAM Project Information* Contractor : American University Principal Investigator: Robert Orttung Council Contract Number : 217-02f Date : October 22, 200 3 Copyright Information Individual researchers retain the copyright on their work products derived from research funde d through a contract or grant from the National Council for Eurasian and East European Researc h (NCEEER). However, the NCEEER and the United States Government have the right to duplicat e and disseminate, in written and electronic form, reports submitted to NCEEER to fulfill Contract o r Grant Agreements either (a) for NCEEER's own internal use, or (b) for use by the United State s Government, and as follows: (1) for further dissemination to domestic, international, and foreig n governments, entities and/or individuals to serve official United States Government purposes or (2) for dissemination in accordance with the Freedom of Information Act or other law or policy of th e United States Government granting the public access to documents held by the United State s Government. Neither NCEEER nor the United States Government nor any recipient of thi s Report may use it for commercial sale . The work leading to this report was supported in part by contract or grant funds provided by th e National Council for Eurasian and East European Research, funds which were made available b y the U.S. Department of State under Title VIII (The Soviet-East European Research and Trainin g Act of 1983, as amended) . The analysis and interpretations contained herein are those of the author . ii Executive Summary Although generally less visible politically since Vladimir Putin became president in the beginnin g of 2000, Russia's oligarchs continue to exert an extensive influence over Russia's political and economi c life. These powerful businessmen now control a greater share of the Russian economy than they di d during the Yeltsin era. Rather than simply focusing on grabbing assets from the state and makin g enormous profits from Russia's export-oriented industries, however, they are starting to play a major rol e in center-periphery relations and the development of regional politics . In fact, big business has done muc h more to change the way that the governors operate than any of Putin's institutional reforms . iii Introductio n Although generally less visible politically since Vladimir Putin became president in the beginnin g of 2000, Russia's oligarchs continue to exert an extensive influence over Russia's political and economi c life. These powerful businessmen now control a greater share of the Russian economy than they di d during the Yeltsin era.1 Rather than simply focusing on grabbing assets from the state and makin g enormous profits from Russia's export-oriented industries, however, they are starting to play a major rol e in center-periphery relations and the development of regional politics . In fact, big business has done muc h more to change the way that the governors operate than any of Putin's institutional reforms . During the Yeltsin era, the oligarchs played a major role in Russia's political life . 2 Most importantly, in 1996, they helped Yeltsin win a second term in office in exchange for extensive propert y provided by the Russian state . Despite this influence though, they only took political office personally o n rare occasions . 3 Putin came to power saying that he would hold the oligarchs at "equal distance" and set u p similar rules for all players on the economic stage . The idea was to "deprivatize" the government so tha t various agencies would no longer be under direct control of specific businessmen . In practice, though, th e new president effectively cut a deal with the country's largest businessmen at a meeting with 21 of the m on 28 July 2000. With the exception of Boris Berezovsky and Vladimir Gusinskii, Putin offered not t o raise questions about the way that Russia's largest companies were privatized or challenge their curren t ownership in exchange for having these companies make their operations more transparent, pay taxes , reduce the amount of money flowing abroad, bring back some of the capital they had already exported , Peter Boone and Denis Rodionov of the Brunswick UBS Warburg research department reported, drawing on a 2002 study that "In our sample of 64 companies, we estimate that 85 percent of privatized companies are now controlled by eight large shareholder groups, whose combined revenues in 2001 significantly exceeded total federa l government revenues . The contrast is stark -- in 1992 this figure was zero ." Peter Boone and Denis Rodionov , "Reformed Rent-Seekers Promoting Reform?" Moscow Times, August 23, 2002 . 2 For the most comprehensive analyses of this period, see David E. Hoffman, The Oligarchs : Wealth and Power in the New Russia, New York : Public Affairs, 2002, and Ya. Sh. Pappe, Oligarkhi: Ekonomicheskaya khronika 1992- 2000, Moscow: Higher Economic School, 2000 . These exceptions were Vladimir Potanin and Boris Berezovskii . See Stephen Fortescue, "Pravit li Rossii oligarkhiya?" Polis, no. 5, 2002, p. 66 . 1 and, most importantly, refrain from getting involved in politics . 4 This deal largely remained in place unti l the summer of 2003, when the Putin administration reacted against Yukos' head Mikhail Khodorkovskii' s increasingly prominent political role by arresting one of his key deputies and questioning the legality o f deals his companies had made in the mid-1990s . While the oligarchs generally avoided overt participation in national politics under Putin, thei r economic power grew considerably. By 2003, the seven largest integrated business groups employe d more than 2 percent of the national workforce, produced 25 percent of Russia's exports, and generated 3 3 percent of its total industrial output . 5 Not only did Putin allow them to keep the property they ha d acquired during the Yeltsin era, he encouraged them to use their financial resources to buy up even mor e enterprises. Thus, to cite just a few examples, aluminum magnate Oleg Deripaska purchased a string o f bus and automobile factories and is moving into the forestry sector . Norilsk Nikel owner Vladimir Potanin is buying large stakes in the agricultural sector, assuming that it will soon be one of Russia's mos t lucrative growth sectors . The MDM group is doing much the same thing . Putin meets regularly with Russia's largest businessmen using the forum of Arkadii Volskii' s Russian Union of Industrialists and Entrepreneurs . The establishment of this meeting place seems t o benefit both sides . Grouping Russia's top executives into such an organization made it easier for Putin t o deal with the country's key business leaders in a convenient way . It also gave the business leader s themselves a way to take their ideas directly to the president . 6 Despite Putin's stated desire to change the way the Russian system worked, its essential feature s remained much the same as they had been . Under Putin, just as it was during the Yeltsin era, the leadin g See Aleksei Zudin, "Neokorporativizm v Rossii? (Gosudarstvo i biznes pri Vladimire Putine), Pro et Contra 6, no . 4, Fall 2001, p. 172 . 5 The groups are LUKoil, YUKOS, INTERROS, Surgutneftegaz, Alpha Group-Renova, Siberian Aluminum - Sibneft, and Severstal . See A. Belousov, "Economic Growth in Russia : Attempts to Overcome Low Levels of Competitiveness," presentation at "Beyond Transition to Modernization and Growth : The View from Russia's Think Tanks," April 10, 2003, Washington . 6 A. A. Mukhin, Novie pravila igry dlya bol'shogo biznesa, prodiktovannye logikoi pravleniya V. V Putina, Moscow: Center for Political Information, 2002, p . 164, Konstantin Smirnov, "Zachem oni tyda khodyat, " Kommersant Vlast, May 21, 2002, pp . 9-12, Zudin, "Neokorporativizm ... " 2 businessmen use their political connections to secure the development of their business interests . ' In many of the most profitable sectors, having access to the key political figures was more important tha n developing normal business practices . This generalization is not true for all industries, however . In sectors such as beer production, success was and is much more a function of the quality of the product tha n political connections. However, in key areas such as banking and natural resource extraction, good acces s to the authorities was critical . Given the changed economic conditions after the 1998 crisis, Putin's deal with the oligarchs an d their increasing economic power, the Russian regions became an attractive place for the oligarchs t o invest at the beginning of the new decade . But before examining how the oligarchs entered the regions, i t is useful to examine the nature of the relationship between business and politics in the regions in the 1990s . The Relationship Between Business and Politics in the Regions During the 1990s During the 1990s, there was a close and mutually beneficial relationship between governors and regional businesses, leading one economist to dub it "an industrial feudalism ."8 Under Yeltsin, governor s relied on their close links with important regional enterprise managers and business leaders to maintain their power. 9 The governors used their business connections to put themselves in a strong position on tw o fronts where they faced challenges : with Moscow and locally. First, local business helped the governors establish strong relations vis-à-vis Moscow because the federal authorities could make little headway against such a united front at the regional level . Second, the interconnections between the regiona l 7 See the comments of Moscow Center for Strategic Research Director Andrei Piontkovskii as cited in Francesc a Mereu, "Russia: Putin Presidency at Two-Year Mark -- Do Oligarchs Still Have a Role?" RFE/RL Newsline, Apri l 19, 2002 .